Question

Sony Corporation has invested $5.6 million in developing super-thin TVs based on new, organic light-emitting diode technology. The company plans to market the OLED TVs in an 11-inch size and produce 27,860 units per year for the first five years. The annual production and operating cost is estimated at $350 per unit and will be sold at $400 per unit. Calculate the present worth for this investment if the study period is five years and the MARR is 2%.

Please show written work, and not just excel. Correct answer is 965,905. Thanks!

Answer 1

Ans:

Cash flow each year = 27860 * ($300 - $250)

= $1393000

Present worth = Cash flow * 1/(1+r)^n

Discounting factor = 1/(1+r)^n

where, r = 2% and n = 5

since the cash flows for year 1 to year 5 are same we shall take sum of discounting factor.

Sum of discounting factor for year 1 to year 5 = 0.98039 + 0.96117 + 0.94232 + 0.92385 + 0.92573

= 4.71346

Present Worth = -$5600,000 * 1/(1+0.02)^0 + $1393000 * Sum of discounting factor for year 1 to year 5.

= -$5600,000 * 1 + $1393000 * 4.71346

= -$5600,000 + $6565850

= $965850 (APPROX)